Indonesia heavily relies on rice production for food security and following production shortfalls triggered by severe droughts, farmers face income losses and, in the most severe cases, additional rice needs to be imported. Due to the limited availability of crop insurance, most farmers rely on government disaster funds as a safety net. Projections of climate models point towards increasing temperatures, more extreme distributions of rainfall with more frequent dry and wet periods and potentially higher volatility in rice production. Central Java is one of the most important rice producing provinces and in order to obtain stability in disaster funds, the government of Central Java requested the International Finance Corporation (IFC), a member of the World Bank Group, to investigate the feasibility of a macro-level risk transfer product as an ex-ante risk management instrument.

Working with IFC as a consultant, I led the investigation to develop a parametric insurance product that relies on regional drought indices and provides indemnity to the government of Central Java in case of severe droughts. The study was supported by the climate modelling unit of the Tropical Marine Science Institute (TMSI) of the National University of Singapore (NUS).

To develop the product, we used over 50 years of historical gridded rainfall and temperature data to compute Standard Precipitation Indices (SPI) and Standard Precipitation Evapotranspiration Indices (SPEI) to quantify meteorological drought extents at 50 km grids. The results show that 4 months SPIs (January-April) and wet season rice production correlate best (0.78), based on which we structured a rainfall deficit trigger (SPI of -5 up to SPI of -20). To validate assumptions of the possible maximum drought intensity, which is necessary to define the indemnity function, the SPIs from the historical rainfall data (1961-2015) were complemented with SPI projections from climate models (2016-2040), revealing that droughts (negative SPI values) are expected to increase in intensity in Central Java.

Preliminary results of the study have been published as a report entitled Developing Parametric Insurance for Weather Related Risks for Indonesia and were discussed with the Ministry of Agriculture of Central Java, the National Weather Service of Indonesia (BMKG), the Office of the Insurance Regulator, the Ministry of Finance and leading Indonesian insurers.